Scaling Profits

Why do so many start ups manage to reach cash flow break even and often manage to break through that barrier but then get stuck in terms of growing their profits much more than that?

Arguably the number one reason is that entrepreneurs have a fear of failure. This is normal, only sociopaths and narcissists feel no fear. The problem lies in an inability to overcome that fear and manage the business in way that balances fear of risk with the equally important requirement to make a return.

Imagine if your boat capsized and you were lost at sea (I launched a start up) with friends (partners). You are disoriented and you cannot see any land (no revenue, all expenses).

The self doubt begins (did I just quit my job for this)? Should you wait were you are and hope for rescue (my product is not selling, do I give it time and hope the customers come)? Or should you try to swim to shore (launch a new product)?

One of your friends (partners) points out that there is a sea current which means it will be difficult to remain stationary (the market will move away from me!). Two other friends (partners) get into an argument on whether there are sharks (competitors) and do they pose a threat?

One friend (partner) takes a long drink of water (orders the AED 10,000 Mac instead of the AED 2,000 PC). Your friends (partners) start arguing over whether the water is communal (are there financial controls)? Or can anyone drink whatever they want (do we run this like Goldman Sachs)?

After an eternity (48 hours) you and your friends reach a relatively large island. You ran out of water (cash) a day ago, most of it because you wasted it (travel & entertainment, incidentals, the company trip to the Maldives), you and your five friends have formed 7 cliques (corporate politics has set in), you have expended a lot of effort (years of 18 hour days telling my wife that success is right around the corner) and you are worried about the people who lent you the boat (investors) and gave you the water (lenders).

This island that you have reached has water and nourishment but nothing else (break even). The question is: Do you have it in you to leave this sanctuary and strike out for home (profits)?

Whilst you ponder this question, there are a few things that you might consider. Endurance activities, and have no doubt that nursing a start up to break even is an endurance activity, takes a tremendous toll on a person mentally, physically and emotionally. The toll is greater if you unwittingly set your sights on the wrong goal. Imagine if you wish to run 5 kilometers but focus solely on reaching the 2 kilometer milestone. You will have nothing left to give for the last 3 kilometers.

This analysis also explains the large number of sociopaths and narcissists in senior positions: There is no toll to pay if you do not care what happens to the company or its stakeholders.

So what can you do to build a profit? First is to nurture a supportive culture that encourages collaboration. Second is to grow the human capital of the company in a manner that is commensurate with the growth of the responsibilities within the company.

More concretely, your plan to profitability needs to start from the beginning. You cannot efficiently change your product offering just because it is no longer useful to your needs. In particular one of the pitfalls to avoid is to overweight ease of selling a product. When there is zero cash inflow it is far too tempting to deploy products and services that are easy to sell, as quantity of revenue is prioritised over quality of revenue.

A second pitfall is using sales crutches that become addictions. Discounts are one example. A unit that you would like to sell for 100 but you discount to 80 just to get going is not one that you will be able to raise the price on later just because you want to. Not when your clients are used to the lower price. Similarly, outsized sales commissions early on will simply not be reversible later.

Getting to break even is only the qualifier. Generating a profit and free cash flow is when the hard work begins.

This article was originally published in The National.